Legal Fee Recovery for Co-ops in Jeopardy

A recent decision by the Appellate Division of the state Supreme Court, First Department, could have far-reaching consequences for proprietary leases in housing cooperatives across New York City.

For several years, Natalie Krodel was embroiled in lawsuits with the Amalgamated Dwellings co-op on the Lower East Side of Manhattan. Her husband transferred shares to her as part of a divorce settlement, but Krodel refused to pay the transfer fees that Amalgamated required, so the board refused to transfer the shares. Krodel sued to compel the co-op to transfer the shares without the fee.

In Krodel vs. Amalgamated Dwellings, the appeals court unanimously ruled that “a proprietary lease providing for payment of attorney fees to a co-op even if it is the defaulting party is unconscionable and unenforceable as a penalty.”

Krodel had signed such a proprietary lease that would have held her responsible for all legal fees, regardless of the outcome of the lawsuit. The appeals court wrote: “To enforce such a provision would produce an unjust result because it would dissuade aggrieved parties from pursuing litigation and preclude tenant-shareholders from making meaningful decisions about how to vindicate their rights in legitimate instances of landlord default.”

“I think this decision is important because this provision in the proprietary lease, which the court was looking at, is very common in many co-ops throughout the city,” says attorney Eva Talel, senior counsel at Stroock & Stroock & Lavan. “This has an influence on a lot of buildings.”

Stuart Saft, partner at the law firm Holland & Knight, says that in his experience the Amalgamated Dwellings proprietary lease goes much further than most proprietary leases. “This proprietary lease says that if the shareholder sues the corporation, then the shareholder has to reimburse the co-op for its legal fees, whether the corporation is right or wrong,” Saft says. “The typical provision, which is also deficient, is that if the corporation is forced to commence legal action against the shareholder, the shareholder has to reimburse the corporation for its legal fees.”

According to Talel, the “unjust result” that the court was concerned about was addressed several decades ago through an amendment to the New York Real Property Law, known as section 234. It states that legal fees are automatically deemed to be reciprocal, meaning that the prevailing party is entitled to recover reasonable legal fees.

Since section 234 was not applied by the appeals court in the Krodel case, Talel sees far-reaching consequences that the court might not have intended. “The impact of this decision is to call into question the legal-fees provision which many co-ops currently have in their proprietary leases, by calling into question their enforceability,” she says. “If [those provisions] are not enforceable, then the proprietary leases have no legal-fees provisions at all, regardless of who the prevailing party is, thus jeopardizing legal fee recovery for those co-ops which have provisions similar to the one in Krodel.”

Boards will have to consider what to do about their legal-fees provisions. Changing the proprietary lease is expensive, and it requires approval of a super-majority of shareholders.

“All these proprietary lease provisions having to do with legal fees have to be updated,” says Saft. “Any corporation that has a desire to collect legal fees needs to amend the proprietary lease provision.”

Adds Talel, “ We cannot alter the court’s decision; we can only fix the documents accordingly.”

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